BC Output-Based Pricing System for Carbon Emissions

March 04, 2024

Written By Radha Curpen, Sharon Singh and Claire Gibson

On April 1, 2024, the new Output-Based Pricing System (OBPS) will come into force under the Budget Measures Implementation Act, 2023 (Budget 2023).  The OBPS is a new British Columbia (BC) emissions pricing system (although not new in the rest of Canada). Effective April 1, 2024, most industrial operators in BC will transition from the CleanBC Industrial Incentive Program (CIIP) to the OBPS.

British Columbia had announced the proposed changes as part of Budget 2023 and amended the Carbon Tax Act and Greenhouse Gas Industrial Reporting and Control Act to enable the shift to the way the province will price greenhouse gas emissions for industrial operations.

Background

In 2008, British Columbia became the first Canadian jurisdiction to implement a tax on greenhouse gas emissions. The tax was initially set at $10/t CO2e and increased by $5 per year until it reached $30/tCO2e in 2012. Initially, the tax was notionally designed to be revenue neutral (i.e., the imposition of the carbon tax was offset by a reduction in the corporate capital tax). Over time this was clawed back and eventually abandoned as a principle and in practice, altogether.

In 2019, BC introduced the CIIP, a program where large industrial emitters could apply to reduce their carbon tax if they could demonstrate their operations were among the lowest emitting in their sector. The government’s intention in adopting the CIIP was in part to ensure industrial operators could remain competitive among other Canadian jurisdictions that had less stringent emission restrictions, as well as among jurisdictions using emissions trading systems (e.g., European Union, California, etc.).

With the introduction of the OBPS, the CIIP will be replaced. Instead, and similar to emissions trading systems in other jurisdictions, a portion of emissions from energy intensive and trade exposed sectors be exempt from taxation. Elements of the CIIP will remain in place during the 2024 transition year. Overall, the change from a pure emissions tax to an output-based system is aimed at supporting BC's goal of reducing emissions by 40 percent by 2030 while also recognizing that most of BC energy and trade exposed industries compete in sectors either without a price on emissions or who participate in emissions trading systems. The OBPS is mandatory for all large industrial emitters who emit greater than or equal to 10,000 tCO2e per year. The design includes facility specific emissions limits, performance benchmarks over time, tightening thresholds and limits on the use of credits. 

The BC government states that this transition from a pure tax to an output-based form will meet standards set by the national emissions pricing system. Our blog provides additional information on the national emissions pricing system under the Greenhouse Gas Pollution Pricing Act which created an output-based pricing system and established a national price on greenhouse gas emissions (Federal Backstop). The Federal Backstop applies to provinces that fail to implement emissions pricing schemes at least as stringent as those prescribed federally. The Federal Backstop is set at $80/tCO2e as of 2024 and will increase annually in $15 increments until it reaches $170/tCO2e in 2030.

OBPS—How it Works and Who Does it Apply to?

The OBPS aims to reduce industrial emissions using a performance-based system.  It provides an annual facility specific emissions limit target for large emitters that becomes more stringent over time. Large emitters who are able to reduce their emissions below an annual facility specific limit will be able earn credits that can be sold or saved for future use. Large emitters who exceed their facility specific limits must either buy credits or make a direct payment at the prevailing price per tonne  (e.g., $80/t CO2e as of April 1, 2024, rising to $170/t CO2e in 2030) on “excess” emissions. 

The OBPS will apply to large emitters in BC that produce certain regulated industrial products under the Greenhouse Gas Industrial Reporting and Control Act (GGIRCA) and that emit greater than or equal to 10,000 tCO2e per year, or that opt-in to the OBPS. This will affect several industries, including the mining and oil and gas industry.

Emissions Limit

Each industrial operation's emissions are assessed against an operation-specific annual emissions limit. The first annual compliance period begins January 1, 2024, and ends December 31, 2024. The emission limit is calculated as:

Emission Limit per Product = Annual Production × Reduction Factor × Production Weighted Average Emissions Intensity

• Annual Production: amount of product generated during the year.
• Reduction Factor: the percentage of priced emissions for a specific product. This percentage is:
  • 65 percent for most products,
  • 80 percent for copper mining,
  • 85 percent for lead-zinc smelting,
  • 90 percent for cement, chemical processing, and lime products, and
  • 95 percent for aluminum smelting.

Facility performance targets will be tightened by one percent per year except for industrial process emissions which have a zero percent tightening rate, effectively exempting process emissions but leaving open the possibility for a greater than zero percent tightening rate at some point in the future. Industrial process emissions are defined as emissions from an industrial process that involves chemical or physical reactions other than combustion. Industrial process emissions are necessary to create certain products, but are difficult to decarbonize or abate, such as emissions from cement, aluminum smelters and chemical processing.

The reduction factors (i.e., the amount exempt from taxation) changed from the initial proposal for the OBPS, which was open to public comment until September 6, 2023 (Initial Proposal). Under the Initial Proposal, the reduction factors were 50 percent for most products, 90 percent for cement, chemical processing and lime products and 95 percent for aluminum products, with the tightening rate being set at two percent annually for all products. Copper mining and lead-zinc smelting did not initially have distinct reduction factors. These changes were made to provide greater protection to certain industries that had little room for additional decarbonization so that they would not be disproportionately impacted by the emissions limits.

• Production Weighted Average Emissions Intensity: the total emissions of the product divided by the total production amount of the product.

The annual limit for an industrial operation is the sum of the emission limits for each regulated product. These emission limits are representative of the average emissions intensity of regulated products. Most products regulated under the CIIP remain regulated under the OBPS, with certain exceptions. For example, for the mining industry, mining silver equivalent was a regulated product under the CIIP but is not under the OBPS. Meanwhile, for the oil and gas industry, renewable diesel and liquefied natural gas were not regulated products under the CIIP and now are under the OBPS. Certain fuel types, such as renewable natural gas, are excluded from the OBPS. This is subject to change, as the Ministry of Environment and Climate Change Strategy is exploring additional products to consider for inclusion.

Compliance Mechanisms

Industrial operations that emit less than the prescribed annual emissions limits can earn credits. These can be sold to other operations or saved to meet compliance obligations within the next three years. Credits can only be used for a portion of compliance obligations. Industrial operations that exceed annual emissions limits must pay for each tonne of CO2e above the emissions limit at the prevailing price. This can be paid through:

• Direct payment: paying the compliance rate charge per tonne of CO2e. In 2024, this is set at $80/tCO2e, and increases by $15/tCO2e annually, up to $170/tCO2e in 2030. This is in line with the Federal Backstop.
• Earned credits: a credit earned when an industrial operation emits below their emission limit. This can be used to meet future compliance obligations or sold to another industrial operation.
• Offset units: verified units that represent emission reductions and removals generated from approved BC carbon offset projects.

The amount of compliance units (earned credits and offset units) that can be used against an operation's compliance obligations is limited, with a maximum of 50 percent usage allowed in 2024, 40 percent in 2025 and 30 percent in 2026 to 2030. Offset units expire after three years for use under the OBPS.

CleanBC Industry Fund

Industrial operators subject to the OBPS will be eligible to apply to the CleanBC Industry Fund aimed at supporting large emitters transition to cleaner-energy solutions. Since 2019, the fund has invested $215 million and will be open for new project applications in spring 2024.

Applying for the Emissions Tax Exemption

Starting April 1, 2024, industrial operations regulated under the OBPS will be able to claim an exemption from paying the emissions tax on their facility-use fuel and combustibles.

Operators can claim this tax exemption by registering for the BC OBPS using their BCeID and applying for a BC OBPS Regulated Operation Identification (BORO ID) via the BC Industrial Emissions Reporting System (BCEIRS) website. The BORO ID is used for completing a carbon tax exemption certificate. If an operator does not have a BCeID, they can apply for one on the BC Government website.

If the industrial operator emits less than 10,000 tCO2e annually but chooses to opt in to the OBPS, they will need to complete and submit one of the two following forms, depending on the type of operation:

• Single Facility Organization application form—for reporting operations where specified industrial activities are carried out at a single facility; or
• Linear Facility Organization application form—for reporting operations where specified oil and gas activities are carried out at one or more facilities controlled and directed by the same operator.

The deadline to apply to be an opted-in operation for the 2025 reporting year is August 1, 2024.

Potential Implications

There was significant concern over the Initial Proposal, including that the OBPS as structured did not adequately account for the challenges faced by some large emitters vis-à-vis limited electrification options and few fuel efficiency or other fuel switching opportunities. In addition, there were concerns expressed about whether the OBPS, when applied to BC emissions-intensive trade exposed industries, would reduce competitiveness of BC industries compared to similar industries in Canada and internationally that are subject to less stringent carbon pricing and emissions laws. The OBPS changes appear to address some of these concerns, while keeping in mind BC's goals to achieve net zero by 2050. 

Bennett Jones has extensive experience advising entities on regulatory compliance strategies, including compliance with carbon credit systems. If you have questions regarding the OBPS, please contact a member of our Regulatory practice group.

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